Many couples made it a priority to settle their divorce cases prior to December 31, 2018 to protect the paying spouse’s ability to deduct alimony which changed effective January 1, 2019 as a result of the Tax Cuts and Jobs Act of 2017 (hereafter the “Act”). While this was certainly the most widely known change resulting from the Act, there are other aspects of the law which will impact divorcing couples as well as intact families. The Act now limits the deductibility of interest paid on Home Equity Lines of Credit (HELOCs) and home mortgages. This is relevant to divorcing couples because in some divorce cases, the parties will turn to a HELOC to fund additional expenses resulting from the divorce.
During the pendency of the divorce, HELOCs may be used to pay increased expenses when one party moves from the marital home. In addition, when there are disputes as to how certain expenses should be paid while the litigation is pending, the parties will agree or the Court will Order for specific expenses to be paid from the parties’ HELOC. Like a first mortgage, there is interest associated with a HELOC. Prior to the Act, a homeowner could deduct interest paid on HELOC debt up to $100,000 so long as the purchase price of the home was at least $100,000. Otherwise, the homeowner could only deduct interest paid on HELOC debt up to the purchase price of the home.
The new law has limited the deduction. Now interest paid on HELOCs can only be deducted if the HELOC funds were utilized to buy, build or substantially improve the taxpayer’s home that secures the loan. If the HELOC is used for personal living expenses, college tuition, a new car, credit card debt, counsel fees, etc., the interest paid is not deductible. However, note that this provision applies to HELOCs effective December 16, 2017 through December 31, 2025. HELOCs taken out prior to December 16, 2017 or under a binding contract before December 16, 2017 (so long as closing took place by April 1, 2018) are grandfathered into the prior law and may take the deduction of interest up to $100,000 regardless of how the funds were used.
The prior law also allowed deduction of interest paid on up to $1,000,000 of mortgage debt utilized to acquire a first or second home. The Act made significant changes to this provision as well. First, there is now a lower dollar limit on mortgages qualifying for the home mortgage interest deduction effective during the same periods discussed above. In accordance with the current Act effective until December 31, 2025, taxpayers may now only deduct interest on $750,000 of qualified residence loans. However, mortgages taken out prior to December 16, 2017 or under a binding contract before December 16, 2017 (so long as closing took place by April 1, 2018) can take the deduction of interest on acquisition debt up to $1,000,000.
As under the previous tax law, to be tax deductible, the mortgage or HELOC must be secured by the taxpayer’s main home or second home. The limit on deducting interest on up to $750,000 of qualified residence loans applies to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home. In other words, if the couple has both a mortgage and HELOC used to buy, build or substantially improve the taxpayer’s home, the total amount of the loans are only deductible up to $750,000.
An experienced attorney or tax expert can help you to determine whether funding expenses from a HELOC is the best solution for your situation.
For more information, visit the IRS website.
If you are considering divorce, contact us for a consultation.